To P3 or Not to P3.

• Author: Gross, John

Public-private partnerships (P3s) can bring substantial benefits and value to the procurement, delivery operation, and maintenance of public infrastructure--although care needs to be taken. Sometimes a P3 is the only practical way to get a project done, but P3 transactions are always complex, and every project is unique, which can make them challenging. Without expert assistance, P3s are usually beyond the expertise of government staff to analyze, negotiate, and structure. In addition to the need for expert assistance, P3 transactions require a major commitment of time and effort by government staff to be successful. Without the appropriate expert assistance and staff time, the government is likely assured that a negotiated P3 transaction will not be as good as it could be--and in the worst case, it may not have been the appropriate transaction to use.This article identifies a number of areas to consider for any potential P3 transaction.

THE ONLY WAY TO GO?

A government can typically find one or more ways to finance a capital project, get a design accomplished, procure a contractor, and operate and maintain the venture. Rarely is a P3 the only model available to accomplish these tasks, and for many government projects, P3s will not be the best solution when compared with other approaches.

However, a P3 may be the best option, or perhaps the only option, for delivering a project in some circumstances, particularly in the case of complex projects where more is involved than basic construction and financing. Examples where P3s may be particularly appropriate are complex land acquisitions, particularly those integrated with private development activities; high-risk projects with significant revenue streams that are difficult for a government to manage; issues with governmental workforces; governmental restrictions; ongoing maintenance issues; political considerations; timing or risk constraints; a need for upfront cash; and financing limitations.

GFOA's Public-Private Partnerships advisory (available at gfoa.org) notes that governments should pursue a P3 only if the project itself is consistent with the goals and strategies of the organization. That is a key foundation, and there are many additional factors that need to be considered when evaluating P3s.

If a government wishes to consider a P3, it should evaluate other approaches either concurrently with a P3 consideration, or potentially before the P3 approach is assessed. The inherent complexity of P3 transactions may make it difficult to detect some potential issues in the early stages of evaluation. Once a government formally begins working toward a P3 deal and negotiating, political and other considerations may make it difficult to properly explore other options later. Appropriate use of expert consultants and attorneys can help guide a government to appropriate evaluations approaches early on and/or identify issues while the P3 negotiations are underway in time to make adjustments or change course, if need be.

COST AND RISK ARE IMPORTANT CONSIDERATIONS

P3s often use taxable financing, including taxable debt (bank loans, private placement, capital markets) and taxable equity. As a result, all things being equal, P3s typically have higher financing costs than government tax-exempt financing. But all things are not always equal. P3s can sometimes use tax-exempt funding, and there may be factors that offset higher intrinsic interest rate and equity return costs for P3s. For example, in current markets, proceeds from a typical governmental borrowing during construction can have high negative arbitrage that significantly increase costs. P3 financing may be able to help reduce negative arbitrage more easily than typical governmental financing. Also, a P3 project may be able to resolve hurdles (e.g., land acquisition, control over a revenue stream, etc.) that a typical government project could not. In those cases, although a P3 project might have higher financial costs, the P3 delivery of a project may be more...